Title: The Future of Oil and Gas Companies

Public pressure on energy companies has never been higher. From divestment movements like “Keep it in the Ground” to financial reporting like that of the Task Force on Climate-related Financial Disclosures, legislation and public opinion have limited the companies’ ability to operate under old paradigms, forcing them to alter their strategies.

Additionally, the price of renewable energy systems has markedly fallen over the last few years. Not only are these technologies attracting billions of dollars of investment, but they are also impacting traditional stalwarts of the energy scene. A good example is General Electric, which has vastly cut back its natural gas generator business.

Companies have been paying attention. From the perspective of “oil majors,” it is vital to find solutions that keep them in the market while addressing the issue of climate change. As our research shows, many international oil companies (IOCs;—think Shell, BP, and Exxon) and national oil companies (NOCs—think Saudi Aramco and ADNOC) have taken measures to reduce emissions in their own operations, and some have started to diversify their spending into new technologies and segments of the energy system.

Still, it remains the case that smaller companies without the wide portfolios of the integrated “majors” have less means to shift their businesses. The ways in which they engage in energy transition, and the kinds of strategies they design in response to the transition, will thus be critical for the future of the industry.

Oil companies have tried to reduce carbon emissions by improving energy efficiency in operations and productions, investing in renewable energy (solar, wind, biomass, geothermal, hydro-power, and marine); increasing the share of natural gas in production; and investing in new low-carbon technologies such as electric vehicles, hydrogen technologies, and carbon capture, utilization, and storage (CCUS). Evidence of these investments is easily found, but it is often difficult to quantify it using public sources. While the scale of this investment is still low compared to the overall capital investment or revenues, there are signs that at least several companies have developed a strategic approach to maintain their performance in today’s market while looking for ways to become competitive in a low-carbon energy landscape.

In general, the IOCs, which represent around seventeen percent of total production, are taking more aggressive actions to diversify into new fuels and technologies as well as to reduce their operational emissions. The NOCs, on the other hand, tend to have less developed strategies and a mixed performance on emissions reduction. This is unfortunate, as seventy-five percent of total oil production and ninety percent of reserves are held by the NOCs. However, several exceptions exist, including Saudi Aramco, ADNOC, Pemex, and CNPC, which are taking diversification measures. Some of the NOCs (along with some IOCs) are involved in oil and gas consortium efforts like the Oil and Gas Climate Initiative, which invests in energy efficiency, electric vehicles, and CCUS.

The competitive landscape of energy remains treacherous. The abundance with which tight oil and shale gas have been brought to the market has created intense competition among suppliers. Publicly traded companies have the added pressure to satisfy their investors’ expectations, including increasing calls to address the risks posed by a low-carbon transition. Nearly all of them prioritize efficiency within their operations, and many see natural gas a means to pursue a lower-carbon future. While no definitive path toward that future has emerged for the oil and gas companies, a few areas of development could provide possible alternatives.

First, companies that operate in environments with regulations on greenhouse gas emissions appear to have more advanced strategies. This is generally true for European companies. Take the Norwegian oil and gas company Equinor as an example: they started developing CCUS projects in the 1990s in response to a tax put on carbon emissions. They also have a very low flaring intensity rate because Norway has strict flaring regulations. This is not to say that companies would not have developed decarbonization strategies otherwise, but it’s clear that government regulations are the driving force behind such changes.

Second, companies are taking different approaches to investment in renewable energy. Companies that purchase utilities and buy and build generation assets have seen a growing trend towards electrification; thus, they seek to get a foothold and some experience in that sector. Those who have chosen not to invest heavily in infrastructure are perhaps less convinced that electrification will grow much in the future, and may not believe it would benefit them to invest in electricity generation or distribution at this time. Purchasing renewable electricity from a supplier can be part of a decarbonization strategy, but may also be based on financial considerations, considering the low prices that have been achieved by solar and wind power generation.

Third, certain technologies appear to attract more investment from the oil and gas companies than others. Most of the companies that are investing in clean energy technologies have focused on CCUS, as well as zero-carbon power generation such as solar and wind. Fewer companies have invested heavily in the manufacturing of low-carbon power generation equipment (e.g., solar PVs or batteries) or taken a position in electricity retail. Not included in our recent analysis, however, are the recently announced investments by a handful of companies in direct-air-capture technologies and nature-based solutions.

The investments that oil and gas companies make today will largely determine the role they will play in the energy transition. Science tells us that we need to move quickly toward a low-carbon world. The investments made by some of the more progressive companies have provided a good springboard for the industry. While all of the companies have a responsibility to take action, the NOCs will play a particularly important role, given their share in global oil and gas production. If competitiveness in a low-carbon energy future is the key determinant of success, the IOCs today are more effectively preparing themselves for a transition compared to the NOCs. However, that may not necessarily be the case in future.

. . .

Sarah Ladislaw is Senior VP and Director, Energy and National Security Program at the Center for Strategic and International Studies (CSIS).

Stephen Naimoli is a research associate in the Energy and National Security Program at the Center for Strategic and International Studies (CSIS).